Examiner report for Unit 1 (Jan 2008)

Unit 1 In January 2008 :

Question (a) : Using an example in each case, identify two different factors of production which may be needed for the production of pizzas that are delivered to homes
Comments of examiners: A small number of candidates gave land as an example of a factor of production but then gave a wrong example that did not refer to the site or raw materials characteristics.


Question (b) : State and explain two possible determinants of the increase in demand for high quality pizzas
Comments of examiners : The best answers usually referred to a change in income/disposable income as a possible determinant. A lot of candidates drew extensively on the first five lines of the case study. The majority of these answers, however, did not recognise the reasons given as being the taste / fashion determinant of demand. Another weakness was that this same so-called determinant was used for a second time.


Question (c) i : With reference to the data, use a supply and demand diagram to show how the global price of mozzarella cheese has increased.
Comments of Examiners : The original intention of this question was to award a mark for answers that explicitly recorded $1940 and $3000 on the vertical axis, hence the line reference.

Question (c) ii : Explain how the global market of cheese might change with the release of US stock piles
Comments of Examiners : This question caused problems for many candidates for the reason stated above. Given the context, it is difficult to see candidates confusing ‘stockpile’ with ‘stocks’, as used to describe a synonym for shares. So not as many candidates as might have been expected gained four marks for some simple market analysis of the sudden release of the additional supply of US cheese onto the market. Although not required, a diagram could achieve three marks.

Question (d) ii : Explain the significance of the price elasticity for mozzarella cheese producers

Comments : There was considerable confusion between revenue and profits when referring to the effects of an increase or decrease in price. Only a handful of candidates stated that the 0.2 estimate indicates that there are seemingly few close substitutes for mozzarella cheese. Rather more candidates explained that the statistic was an estimate and that producers should bear this in mind when making pricing decisions.

Question (e) : Using evidence provided, comment on the extent to which the market for high quality pizzas may be considered to be one of monopolistic competition

Comments : To obtain marks though, it was essential that the written answer was applied to the high quality pizza market.
As in previous examinations, there were some weak answers from candidates who wrote about ‘monopolistic’ and not ‘monopolistic competition’. These answers did not gain marks due to the confusion with monopoly. Two marks were most typical for commenting that the market was most likely an oligopoly due to the dominance of well known brands. Rather more comment was needed for full marks; for example, that data was needed to make a proper assessment or further information was needed on some of the other characteristics of an oligopoly

Question (f) : Discuss the extent to which the increase in the global price of mozzarella cheese is really of serious concern to all pizza producers

Comments : The main way that most candidates used to reach Level 4 was to distinguish between large and small pizza producers. This was usually done by considering how larger firms could benefit from economies of scale, particularly through the bulk purchasing of mozzarella cheese. Other possibilities were to make assumptions about the price elasticity of demand for pizzas or to discuss how other variable costs might be reduced. Some answers recognised correctly that all producers would have to bear the costs and that the market structure could have a bearing on pricing decisions. A high mark on this part required a discussion of more than one of these aspects.

Why does the aggregate demand has the downward slope ?

I found out on internet and I ll summarise it as 3 main explainations :

- Interest Rates :
In the economy, we have a fix amount of money. The price level representing for the amount of currency we have to spend to purchase something. If the price level is high, therefore we have to have a large amount of currency to purchase. And with low price level, the quantity of currency we have to purchase is less. Suppose that some of these money that we do not spend, will go to bank as a saving. It will lead to the rising in bank loans and therefore it will drive down the interest rate.
With lower interest rates, firms are easier to borrow and therefore the investment will increase, which leads to the increase in aggregate demand ( because Investment is one of factors determine the aggregate demand).

- Exchange rates :
When the price level falls, the interest rates is driven down and therefore it more likely to decrease the exchange rates. Lowering exchange rate can increase the net export because the price of export become cheaper. Price level falls, exchange rates fall, increase in net exports which contribute to aggregate demand >> therefore AD increase.

- Wealth :
The lower price level is, the more you can afford to buy >> therefore it increases the consumption and leads to the increase in aggregate demand.

AS micro essays (8)

Food is necessary to life and to maintain the national security. Efforts are often made to stabilize price and incomes of farmers. Most of the governments intervened to the agricultural market to ensure that an adequate amount of food is supplied at the acceptable price. The impact can be positive or negative to the economy depends on how the consumers and producers reflect to the policies. However, to the end, the circumstance is that the intervention of the government spill over the international trade in food products.

Intervening into the agricultural market by setting a barrier always is carefully considerable by the government. The price in free market has to be set by the demand and supply forces. We always have question that whether we are using our resources in the most efficiency way. The low price in the free market needs to be made by the increase in the productivity or the achieving economy of scales, not by supporting from government. So therefore intervening into the agricultural market often contents the fear that market fails in achieving productive and allocative efficiency. But in the other hand, appropriate policy at suitable time will bring benefit to the economy.

The most common type of trade barrier is the tariff. Tariffs discourage imports by rising

the price of the imported good, thus discouraging consumer purchases. Domestic

producers benefit from reduced competition and higher prices, and producers in exporting

countries are harmed by the reduction in the level of exports.

Unlike tariff, which allows goods flow into the market without limit, quota fixes the quantity of import products that can go legally to the economy. The function of the quota is, by reducing the available of import goods in the market, the price of import product will rise and therefore it brings to domestic products more competitiveness.

Quotas can have unintended side effects, as illustrated by the U.S. sugar program. Selected countries are each allocated a fixed quantity of sugar which they can legally export to the U.S. These quotas protect U.S. producer prices, which are higher than world prices. Over time, high U.S. sugar prices have encouraged increases in domestic sugar production. Corn growers have become major supporters of the U.S. sugar program because the higher U.S. sugar price resulting from the quota led food manufacturers to substitute high fructose corn syrup (HFCS) for sugar. Therefore, with the sugar program, production of HFCS has been highly profitable; without the sugar program, sugar prices would have been lower and HFCS production might not have been profitable.

Barrier entries also bring to the war in economy. In most cases, losses equally taken by both countries. . For example, the EU has banned the use of growth hormones in cattle production in member countries and has banned meat imports from animals which have been given growth hormones. This essentially eliminates all meat imports from the U.S., where use of growth hormones has been judged safe. The U.S. has challenged the ban and both sides claim to have a scientific basis for their position. Similarly, the U.S. has banned imports of all fruits and vegetables treated with ethylene dibromide, but other countries disagree with this decision.

In conclusion, international trading should be liberated. Each country has its comparative advantage, and the trading will have the circumstance that both economies will gain benefit. By eliminating the barrier in the agricultural market, it will bring benefit to the whole economy even though the cost is some domestic sector might get worse off. And more important, it will avoid the trading war which just will damage the economy

Phillip Curve

Phillip Curve shows the relationship between level of unemployment and level of inflation. It is a trade-off between them, which means that if there is a rise in unemployment, therefore it would be a fall in inflation rates and vice versa.
When there is an increase in unemployment rates, more people now are not spending much as before. Therefore it could be a decline in the consumption, which is one factor, determined the aggregate demand. The rate of unemployment strongly depends on the aggregate demand. So a raise in unemployment rate would lead to a fall in aggregate demand and therefore, the rate of inflation will be reduced.

However, this model is not always true. It can’t explain the situation of the economy when there is a stagflation, which means that there is slower economic growth (or recession) combine with higher level of unemployment. So that new model has introduced base on the idea of Phillip Curve to explain it.Supposing the rate of inflation is now at 0, and therefore the rate of unemployment is at U. After time, the government realised that it is a high level of unemployment and they want to intervene to fix it. What they might do is to boost the demand for the market. After intervention, the unemployment rate is improved, it contracts from U to V. As there is a rise in demand, the inflation rate will increase as there is a rise in price level. Therefore prices get higher, and workers now required a higher real paid for their works.

However as there is a rise in their wages, workers now realised that their increase is just a nominal increase, therefore they might stop supply more labour and the output will return to its original. And finally, in the long run of Phillip Curve, there is a rise in inflation but a sustained in level of unemployment.

But.....
If inflation rises then exports become uncompetitive and so they fall. Exports are injections so AD falls which means unemployment raises.
If there is inflation then demand for Imports will rise and so leakages increase and so...unemployment rises.
If unemployment is low then exchange rates are high which makes imports competitive, exports not so...so unemployment raises.
So, really, inflation is high and unemployment is high; inflation is low and unemployment is low.
The exact opposite.
Or is this wrong...?
.... Absolutely true ...